The Coast Trader was torpedoed and sank 35 nautical miles (65 km; 40 mi) southwest of Cape Flattery, off the Strait of Juan de Fuca in U.S. state of Washington by the Japanese submarine I-26.

[6] On June 7, 1942 the Coast Trader departed Port Angeles, Washington for San Francisco with a cargo of blank newsprint.

Coast Trader had lookouts watching for Japanese submarines, but I-26, had been following the ship for 4 miles (6.4 km), since Neah Bay, Washington, at periscope depth.

The torpedo put a six-foot (1.8 m) hole in the starboard side of the ship just below cargo hatch #4 in the stern, allowing water to rush in.

The torpedo explosion tossed cargo hatch #4's cover, as well as part the 2,000 pounds (910 kg) of rolls of newsprint stowed in hold #4, into the air.

Virginia I called in an SOS, and a United States Coast Guard aircraft found the rafts from a flare they put up.

The Coast Trader had a crew of 56: nine officers, 28 seamen and 19 United States Army armed guards that manned the deck guns.

The United States Navy did not, a first, want to acknowledge that Japanese submarines were active off the US West Coast due to the U-boat's Second Happy Time.

[7][8] The commander of I-26, Minoru Yokota, reported torpedoing a merchant vessel on the date and at the location where the Coast Trader sank, when he returned to Yokosuka, Japan on July 7, 1942.

He also reported shelling Estevan Point lighthouse on June 20, 1942 and sinking the SS Cynthia Olson on December 7, 1941.

EV Nautilus' remotely operated underwater vehicles Hercules and Argus found the Coast Trader resting upright on the sea floor.